JF1058: Creative Financing 101: Unconventional Ways to Acquire Property With Jesse Mills

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Jesse Mills Real Estate Background:
-Senior Mortgage Advisor, Real Estate Investor, & Consultant at American Mortgage & Equity Consultants, Inc
-From the age of 14 he was out knocking on hundreds of doors starting his first business “Mills Lawn Care”
-During college, he co-founded a small sunglass kiosk business within shopping malls in MN and WI.
-Based in Minneapolis, Minnesota
-Best Ever Book: Cash Flow Quadrant

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki (Rich Dad, Poor Dad) and a whole bunch of others. With us today, Jesse Mills. How are you doing, my friend?

Jesse Mills: I’m doing great, man. How are you doing?

Joe Fairless: I’m doing great as well, nice to have you. A little bit about Jesse – he is a senior mortgage advisor, he’s a real estate advisor and he’s a consultant at American Mortgage and Equity Consultants. From the age of 14 he was knocking on hundreds of doors, starting his first business, which was Mills Lawn Care, and he is based in Minneapolis, Minnesota. With that being said, Jesse, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jesse Mills: Absolutely. For probably the last 14-15 years I’ve been in the residential mortgage business in finance, and got into real estate investing about six years ago. It’s been a pretty cool journey to be on both sides of it; you find a lot of people that are doing loans and mortgages and financing, and they don’t really do much on the actual real estate side; they just help people get financing.

Then others are on the real estate side, but really don’t know any of the rules on the mortgage side, so I kind of got into some different niches with it where I’m able to take both sides of the businesses and the knowledge and kind of start creating my own passive income, and then helping others do the same.

Joe Fairless: Combining those two niches, what are some competitive advantages that you have based on your areas of expertise?

Jesse Mills: My first kind of foray — I got into real estate investing almost a little backwards form what some people do. A lot of people take the old school approach and say “No money, no credit – hey, that’s me!” and that kind of gets them into the game. I was already doing loans, I knew how the rules worked, and for some reason I missed the boat; maybe it was a good, right? A lot of my friends and colleagues and partners just jumped all over it pre-crisis and got a ton of places and they lost them all, because everybody was doing it kind of the wrong way, all banking 100% on appreciation, not on cash-flow, and lost it.

Well, I started kind of scooping up places after everything had died down, and it got a lot tighter to get properties. But the first few deals I did were multifamily properties that I purchased, and then started kind of hearing about lease options, or rent-to-own. I followed people like Wendy Patton, Joe McCall, and I said “Wow, this is pretty cool. I didn’t realize that you could make money doing this”, and I was running into those people – people who can’t get financing, can’t get a loan, but really wanted a home.

So I just kind of really dipped my toes in the water the first couple of years, and said “Hey, I’m running across these people once in a while that I have to shoot down, when everyone else said they would go see who was in my position as a loan officer is shooting them down and saying “Sorry, come back and see me in a couple of years.” Then I had kind of had this new arrow in the quiver. I’m like, “Hey, I can still help you get a house, I just can’t get you a loan today.” That really kind of got me into the lease option world and that’s been kind of my niche for the last 5-6 years now.

Joe Fairless: Okay. I wanna spend the majority of time talking about those lease options, since that’s what you’re focused on and have been for the last six years, but I do wanna ask about your multifamily deals – you said that your first couple were multifamily deals… Will you elaborate?

Jesse Mills: One of the first places that I got was a fourplex with FHA financing. I lived there for probably a year, a year and a half or so. And honestly, anyone who’s looking to get into investing, buy and hold and have their own place, I’ll tell you number one – do it while you’re young and probably not married, you know… Maybe three kids, if you can… Not a lot of wives are out there saying, “God, I would love to have three neighbors above us and below us, and share the yard with everybody…” It isn’t that sexy. At least my wife wants our own yard and all that good stuff, but that’s one of the smartest moves that you can make, and from a financial side you can buy a fourplex with 3.5% down if you’re gonna live there, and help qualify basically the rental income of [unintelligible [00:06:29].06]

That’s what I did, and we acquired a town home. We did kind of the normal financing really for the first few deals, until I discovered lease options, rent-to-own. Since then, a bulk of my lease option deals have been wholesaling lease options and flipping them for a quick profit, and then a few I’ve retained and done sandwich deals on; a couple I’m in the middle on right now. From a financer perspective too we could talk about this, which is kind of cool, but I even like to purchase on a CD or a contract for deed, and then resell on a lease option and there’s some good benefits that way, but not everybody does it that way.

Joe Fairless: Let’s talk about that, because I think I just got confused, and perhaps some other Best Ever listeners did as well, as far as purchasing on a contract for deed and reselling on a lease option. Will you just slowly walk through a specific example?

Jesse Mills: Absolutely. One deal – it’s a great kind of statement deal, because the lead source was not where you would guess… I got it from an attorney. Everyone else is out there digging in the same holes and fishing in the same ponds – Craigslist, Zillow, online and bandit signs… I find, especially to a lot of the coaching that I do now and working with a lot of investors around the country, not a lot of people are using their own network, and I advise everybody, get your own attorney, get a local attorney, even if you’re buying boilerplate contracts in some place, and of course, have it checked out.

So I developed a good relationship with my real estate attorney, and he said “Hey, Jesse, I’ve got a deal for you. It’s a client and she’s looking to unload her place. She’s on the West Coast and doesn’t want her place there anymore.” It was free and clear, which was even better, so I negotiated with her to buy it on a contract for deed, and I knew based on the area of town that this was in – it’s in probably one of the top three areas of our market; great schools, great neighborhoods, and you can sell it really quick. So I purchased it on a CD, 10k down…

Joe Fairless: What does buying it on a contract for deed mean?

Jesse Mills: Contracts for deed are (in other parts of the country a “land contract”) – you have a contract for the deed. So essentially, it’s seller financing. It’s another way of saying seller financing.

Joe Fairless: Okay.

Jesse Mills: So I pay the owner every month; she was the bank to me. And the beautiful thing with seller financing is, you know, it’s whatever the heck you want it to be. People say “Well, what’s the going rate on this?” It’s whatever the heck you want it to be! It’s whatever’s a win/win situation for all parties involved. But from the finance side – and this is kind of where my expertise really helps out, is there’s reasons to buy something on a contract for deed, and there’s reasons to buy something on a lease with an option of purchase. There’s reasons to be a tenant, there’s reasons to be the owner on a CD.

So on a contract for deed or land contract, you have equitable title. You’re on the tax records. You’re fully responsible for everything, but you’re also able to then sell it, lease it, get financing on it to do whatever, and after 12 months of being on title – at least these are the current rules; things are always changing, as you know, in the mortgage world… But once you’re on title for 12 months, then if you wanna go buy it, it’s actually a refinance.

Let me give you this example. I bought it from this woman for $260,000. I knew at the time it was around probably 290k-300k. If I purchased it from her on a lease option or a rent-to-own, even if it was worth 300k and I went to go get financing out and put it in my name and get a mortgage, then when I go to buy it, I still needed to come up with that minimum down payment based on what I was buying it for, which would have been the 260k minus the 10k I put down.

But because I bought on a contract for deed, 12 months and one day I could now say “Hey, I wanna refinance this”, and then they would go in and appraise it and say “Hey, that’s worth 390k” or “It’s worth 300k”, and they’ll say “But you’re only buying it for 260k and you already put 10k down, so you only owe 250k, and it’s worth 300k or 290k.” So I would already have equity in the ball game.

That’s one thing a lot of people don’t pay attention to when they’re looking at a lease option, rent-to-own – sure, it gets you in the door with little to no money down, but you still have to come up with money at some point prior to your lease expiring and your option ending to get financing. And if you’re not gonna live there, it’s gonna be an investor loan, so you’re gonna have to have 20% down… I mean, between 15% and 25%, depending on how many units it is.

So in this scenario, I can put it in my name and I negotiate a second three-year or four-year contract for deed on it, but I’ve already got equity in it as we speak now, which is great. So within about 3-4 weeks I got a new tenant-buyer in there, who gave me 10k down. Now I’m back to zero, and my payment is about $1,100/month to the seller, and I collect about $1,800/month from the tenant buyer.

Joe Fairless: So you’re making a spread on a monthly basis as well.

Jesse Mills: Exactly. So it’s a great sandwich deal… And again, I could have bought it on a rent-to-own and then flipped it and did a sandwich — I should say “flip it”, but it’d be a sandwich, right? But I wanted it on a contract for deed, so that way I could come in and refinance it, put it in my name and already have some equity when I want.

Plus, for the seller, she was more inclined to do the deal on a contract for deed, because in her mind it felt like it was really more sold, whereas on a lease option she’s still the landlord. That’s the cool thing – when you start to really understand the difference with the contract for deed/land contract and a lease option, you can really tailor your presentation however you need to. I’ve had people say “No, no, no, I’m not gonna do that, but I’ll do a rent to own.” Okay, fine. “No, no, no, I’m not gonna do that, but I’ll do a contract for deed… But only that!” Okay, fine. You can call it what you like, but it’s almost the same thing; there’s definitely some differences with the contracts and with taxes and insurance and tax deductions, but from a 30,000 foot view it’s very similar.

Joe Fairless: What are the risks involved for you on that type of structure?

Jesse Mills: Again, on a sandwich deal – and sandwich deals are awesome when you come across some. More often than not, we’ve found people who just don’t have as much equity, so we’ve done more of a lease options split, or an assignment. But on a sandwich deal like that, not matter what, whether the property is vacant or not, whether it’s damaged or destroyed, I’ve gotta keep paying her.

If I go let’s say two years and I’m paying the true owner, who’s on the other side of the country, and all of a sudden I have an empty house and I go “Oh, I can’t pay you anymore” and I just up and leave or stop paying her, she can cancel the contract. It’s similar to a foreclosure, but it’s actually technically called a cancellation of contract. Then I would have 60 days to get that back to being current and pay again, or I’m done, and I would lose every dollar of equity that I had.

So again, it’s like getting foreclosed on on a normal property, but I bought it knowing there was equity, I bought it knowing there was cash flow and there’s a spread, and even if these tenant buyers didn’t’ work out – and I’ve developed a pretty cool system for screening tenant buyers… Our efforts’ success rates for our team of folks buying is close to 70%-75%, and I know the industry average — I don’t know, there’s numbers all over the place, but it’s 40%-50%; that’s what a lot of folks say. And I know what that is, because most people don’t know what the hell they’re doing when it comes to credit, or why somebody can’t buy and the reasoning behind it. So that’s why we’ve now kind of put together some pretty cool screening systems that I use, and I do some pre-pre-approval consulting for other lease option investors around the country, to really help them say “Hey, is this a good tenant buyer? How are they actually gonna be able to get a mortgage? When will they be able to get a mortgage?” and make sure they do the paperwork right, so when that gets to an underwriter, it should actually get approved.

Joe Fairless: What type of paperwork is involved there?

Jesse Mills: When you’re purchasing on a lease option, or when you do the contract for deed?

Joe Fairless: When you’re purchasing on a lease option.

Jesse Mills: So when you’re purchasing on a lease option the two biggest things that I see other investors do that can trip you off is not using an escrow service or an escrow company, or even a title company or an attorney. They just have a tenant buyer write a check out to them; now, this is on a deal if you’re assigning it, which a lot of folks are doing and a lot of people are teaching that. So if I say I’m gonna buy your property [unintelligible [00:15:10].03] to purchase your property and then turn around and assign it to a tenant buyer… If that tenant buyer comes in and cuts me the check instead of you, or the escrow company or the title company or the attorney, right now everybody is fine and everything looks like it’s going great, and it’s going to be a big explosion here in like two years or three years, because the underwriter for the mortgage company is gonna say “Who the heck is this chesty guy in the middle? I thought it was Joe buying D’s house with this chesty guy who’s his company.” So it’s gonna be done right, so you wanna make sure that the tenant buyer is cutting a check to — again, I’ve used the local attorney, which is awesome, because they’ve done my contracts, so that they know exactly what they’re in for, what they’re signing; I use their escrow account, I’ve used local title companies, and all these international escrow services, too. That’s probably one of the biggest things.

I like to keep the lease and the options to purchase separate as well, and there’s a few different reasons for that. Number one is if you need to go to court — now, again, this doesn’t always work out this way, of course, and I’m not trying to give any legal advice, but it’s often easier just to say “Hey, here’s a lease.” If you’re late on the lease, you’re violating a lease agreement. It has nothing to do with the option of purchase. Can it be construed as an equitable mortgage? It certainly can sometimes, even if you do them separately. But if you combine them, it’s a lot more likely to be misconstrued as you’re doing an equitable, and then you get into those different types of rules, and whether you get the down payments, or really it’s the option deposits – if you get that back or not.

The big things I say are keep the two separate, and then use a title company or an attorney or an escrow service for the transfer of funds in the option deposit.

Joe Fairless: In addition to what you’ve mentioned, what’s one more maybe common mistake that you see investors make when they’re putting together a transaction like that?

Jesse Mills: They don’t know why the tenant buyer can’t get a mortgage or what the reasoning is, and that’s really one of the biggest things. These days with the way mortgage financing is, almost anybody can get a loan in three years. Even if you just went through a foreclosure a few months ago, I can get you an FHA loan here in three years from that date, so a lot of the times it’s just a kind of a black hole timeframe that people are stuck in. If you had a bankruptcy, it’s gonna be X amount of years; if you had a short sale or a foreclosure, it’ll be X amount of years. If you’re new at your job it’s gonna be X amount of years.

The worst thing is if you have someone who’s making $40,000 a year and trying to buy a $400,000 house – that’s just not gonna happen. This is simple math – if you can’t afford, then what’s gonna change to allow you to afford it? But the big thing is why, why, WHY? So I’ve developed a 33-point checklist that I used with all of my tenant buyers and then with my clients and their tenant buyers to really get to the heart of what happens.

When people say “We went through medical issues”, is that [unintelligible [00:18:09].11] Unless it’s still ongoing and you weren’t working two weeks ago because you’re going through something horrible, if this was a year or two or three years ago and then all domino is hit, there’s not much more you need to tell. That’s a great story — I mean, it’s a horrible story, but it’s a great story as far as why you have maybe poor credit and you can’t get a mortgage. Divorce. Divorce screws everybody. Pun intended. Divorce is bad.

Job loss. How long ago was the job? “Well, I was out of the job for six months, but that was two and a half years ago, and then the *beep* hit the fan.” Okay, these are all great reasons.

Someone that I’m working with right now, literally I was going through her credit with her a week ago, and I said “Okay, so tell me what happened”, and she said “Oh yeah, my husband got laid off a while, he got really sick, and some other things happened…” I’m like “I’m so sorry to hear that… Tell me a little bit more about it – when was this?” “Oh, this was in 2006”, [laughter] and I’m trying not to laugh. “Okay, so in 2006… Why didn’t you pay your truck payment in November, because I’m seeing 90 days past due on the credit report? If you’re still hurtin’ from then, we’ve got some issues.”

So a lot of folks just don’t really peel back the onion, never get into it. Is it a good reason, is it a bad reason? Does it make sense, does it not make sense? I’ve turned people down, and trust me, it sucks… But if someone says “Yeah, I’ve got $10,000, I want this house” and I turn them down, that sucks! I could have used that, and I wanna help you, but you have literally no good excuse or reason to why you can’t pay your crap on time, and I know this is gonna flake out… And I’m willing to take more risk if it’s my own property and there’s some good [unintelligible [00:19:48].11] cash flow, but if I’m working with a seller who is also my client that I’ve got a lease arrangement with them that I can honor or assign, I’m not gonna put someone in their house that I know is not gonna make [unintelligible [00:20:00].22] I’m just not gonna do that.

That kind of goes back to treating this like a business; this is just a transaction. Do you want people to think of you 2, 3, 4, 5 years down the road, or are you just trying to do a bunch of deals right now and then get into a whole other line of work immorally?

Joe Fairless: Jesse, what is your best real estate investing advice ever?

Jesse Mills: Best real estate investing advice ever is you’ve gotta just get started. I talk to people every week, all the time, and they’re reading and they’re researching and listening and that’s great, but people put that up on a pedestal too much and they don’t get started, they don’t get going. You’ve just gotta start taking action.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Jesse Mills: Let’s do this.

Joe Fairless: Alright, let’s do this. First, a quick word from our Best Ever partners.

Break: [00:20:48].15] to [00:21:45].15]

Joe Fairless: Best ever book you’ve read?

Jesse Mills: I’ve gotta say Cashflow Quadrant. I love it.

Joe Fairless: That’s been appearing a lot recently from guests, Cashflow Quadrant.

Jesse Mills: It’s an oldie but a goodie. It always brings me back to the fact that look, sometimes people get caught up in the day-to-day work, but it’s all about passive income, it’s all about getting to that business owner quadrant, to that investor quadrant. Even if you’re self-employed, if you stop working, you’re not making money then. You’ve gotta think about that every day with everything you do.

Joe Fairless: Best ever deal you’ve done?

Jesse Mills: You know, it’s funny… The deal I was mentioning earlier actually is probably one of my best deals, because the first tenant buyer unfortunately did not buy; they chose to back out, so I made $10,000 on it. I’ve got another tenant buyer in there, I made another $10,000 on it, and with the market the way it is right now we’ll sell it for probably 60k-70k more than we bought it for, and I haven’t spent more than probably $500 to fix and repair it in two and a half years.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Jesse Mills: I did not check if payments were being made as frequently as I should, and we had a close that I could check at any time to see if it’s making payments; honestly, I just got side-tracked, I had too much going on for a few months, and he let that property go, so the deal ended up kind of going kaputt. Luckily, I only put down $3,000 to control a $150,000 fourplex, so… I didn’t lose anything, but I didn’t make anything either.

Joe Fairless: What’s the best ever way you like to give back?

Jesse Mills: I love to give back to new investors, new business owners who are struggling, who don’t know where to get started, don’t know the right steps to take to get going, because honestly, I think one of the best things you can do is to teach somebody how to better their own life and better their own position by giving them the skills and the resources to get started.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Jesse Mills: The best way would probably be on Instagram  – ZJesseMills, or on Facebook, Jesse Mills.

Joe Fairless: Jesse, thank you for being on the show. Wow, this was a crash course on seller financing and how to structure the deals, how to do seller financing 2.0, so buying it on a contract for deed and being able to qualify — one of the things that you’re focused on is making sure that you pre-qualify the people prior, and you said you have that 33 point checklist. I love hearing about how you structure this, the intricacies of it, and the risks as well as the benefits associated to it.

Jesse, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jesse Mills: Hey man, thanks so much for having me, I appreciate it; I look forward to talking again.

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